What does the SMCR mean for directly authorised firms?

The Senior Managers & Certification Regime (SMCR) will come into force for 47,000 directly authorised advisory firms on 9th December 2019. The SMCR introduces changes to how the FCA regulates people working in financial services and will replace the Approved Person's Regime for directly authorised firms. This new regime aims to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence and codifying a culture of personal responsibility that enables regulators to hold people to account.

Appointed representative firms will remain under the Approved Person's regime, at least for the time being, as legislation is needed to extend the FCA's powers to ARs.

Depending upon the size and complexity of the firm, there will be different levels of work to do in preparation for SMCR implementation. Those firms with strong governance structures and well-documented systems and controls should not find any significant challenges but for others, this may represent a more fundamental change to their business.

Much of this depends on the complexity of the organisation. For Core firms, the transition shouldn’t be too onerous. The biggest challenge for Enhanced firms will be in relation to the Statement of Responsibility and the Responsibilities Map, and systems to ensure they stay up to date. Put simply, for a one-man firm, it is totally obvious where responsibility lies for all aspects of the firm's activities, but for a larger firm, this may be much less transparent, so there is work to be done in clarifying the statements of responsibility and avoiding, where possible, shared or split responsibilities.

Identifying certification staff and undertaking annual  recertification for their role also represents more of a burden for larger firms. Additionally the new Conduct Rules will apply to the majority of staff, who will require training on the rules and their applicability to their specific role, and will need to fall into an enhanced annual training regime.

In terms of management responsibilities, for an Enhanced firm there are 12 prescribed responsibilities which are expected to be allocated to executives, except those to be allocated to a non-executive director who does not have management responsibilities. For firms in the Core regime there are only five. PIMFA has produced a useful guide to the SMCR, which maps out the responsibilities for firms in the Core and Enhanced regime and Tenet has produced its own guide for our directly authorised clients, who we know from our own research mainly fall into the Core and Limited Scope regimes.

Perhaps the biggest challenge however for advisory firms is how the FCA will supervise the regime, as it is all about taking 'reasonable steps' which can be quite subjective. It will be interesting to see how this pans out over time but documenting the rationales for the approach and decisions taken will be important for firms and their senior managers to become practiced at.

As this regime started with the banks, PRA investment firms and some insurers in March 2016, advisory firms are at least getting the benefit of additional FCA guidance that didn't exist when it was originally rolled out. It is the clear intention of the FCA however to hold senior individuals within firms accountable for the compliance and conduct in their areas of responsibility and so the extension of the SMCR is not only a compliance change, but a cultural one as well, with concern about how business is done as well as what business is done.